When it comes to safe bets in Hollywood, you would have thought the stunning Australian actress Naomi Watts would have been a sure thing. Watts shot to fame after a notable lesbian romp in David Lynch's Mulholland Drive. She's blonde, talented and will star in Peter Jackson's first post-Lord of the Rings movie, King Kong. All in all, an excellent gamble, then.

Er, no. Unfortunately, I have now lost $100,000 on Ms Watts. The actress has seen her value plummet by more than 60% after foolishly deciding to make a couple of small 'indy' comedies that have bombed. The only conciliation is that I haven't lost any real money. My gamble on Ms Watts' career is part of a virtual game played by 1.3 million hard-core gamblers, financial traders, the Hollywood elite and Average Joe movie-buffs worldwide.

Trading places
The Hollywood Stock Exchange (hsx.com) allows traders to bet on everything from the likelihood of Alec Baldwin resurrecting his career to how much the new Harry Potter movie will make at the box offi ce.

It's one of a growing number of real and virtual exchanges that allow punters to gamble on future news events in the same way city traders bet on financial data.

Although HSX is only a game, its owner, UK spread-betting company Cantor Index, is using the exchange to create real gambling opportunities. These are currently only available in Britain, but the company is looking to launch a US product that will allow HSX traders to swap 'Hollywood Dollars' for real dollars.

HSX was started in 1996 by stockbroker Max Keiser and Michael Burns, a former investment banker who is now vice-chairman of Lions Gate Entertainment. The company was sold to Cantor in 2001 when the potential for real gambling started to emerge.

Star wars
HSX allows its members to buy stock in stars and movies. The movie bonds are priced according to how much the market expects the film to take at the US box office in its first four weeks. For example, if the market expects the latest Harry Potter film to make $200 million in four weeks, the stock will be priced at H$200.

If the movie makes more than $200 million, or if the market price rises in anticipation of the movie making more money, then stockholders will profit. They will lose if sentiment turns against the film.

A punter can also go short on a movie. If you think there's no way Harry Potter can take $200 million in four weeks, you can buy 'short' contracts so you profit if the movie bombs. Similarly, you can buy stock in an actor or actress, or bet against them. I bought 5,000 shares in Naomi Watts at about H$30 each, assuming King Kong and her other forthcoming movies would push up her value. Unfortunately, Watts' share price has fallen to just H$10 a share and I've lost a fortune.

Nicole Kidman has also cost me money. I bought her movie Birth for H$12.50 a share, assuming there was no way a Kidman movie could only make the $12.5 million HSX was predicting. I was wrong, and Birth will struggle to make $5 million at the box office.

However, I did anticipate the furore surrounding Colin Farrell's portrayal of Alexander the Great and went short on the movie to make about H$10,000.

For a few dollars more
I also bought War of the Worlds (which stars Tom Cruise and is directed by Steven Spielberg) for H$100 a share and sold at H$150. The movie opens in the summer, but I decided to take my profits now rather than wait and see how much more it rose.

The new Indiana Jones movie is also looking very attractive, at H$62 a share. Obviously, if this film gets made, it will make massively more than $62 million at the box office, but it hasn't been 'green lighted' yet, so I may have a long wait to make any money.

This ability to gamble on the future of a movie or star has made HSX big news in Hollywood, where actors and actresses have been known to heavily trade their own stock to push up the value.

'From what we hear, the starbonds are actively traded by the stars themselves,' says HSX managing director Alex Costakis. 'They pay close attention because this is the only mechanism of determining how the public rates a star or director on a real-time basis.'

At the moment, the only real-money gambling linked to HSX, which is free to play in the virtual form, is available in the UK.

Cantor Index uses the data generated by HSX to offer spread-betting prices on blockbuster movies. For example, a punter can bet £10 on every million that Harry Potter makes over $200 million. If the film makes $210 million, the bet will pay ten times £10, or £100. If Harry Potter only clears $190 million, the punter loses £100.

Cantor Fitzgerald, which owns Cantor Index and HSX, hopes to expand the real-money gambling opportunities with the launch of a global entertainment futures contract that is based on movie takings.

However, there are other ways HSX generates income, including advertising and selling research to the movie industry.

This research has become very valuable to the studios, as HSX's predictive abilities are now legendary. The popular Oscar bets are nearly always the most accurate in the industry - HSX correctly picked three quarters of the nominations and seven out of eight award winners in the main categories last year.

HSX has also been successful in determining opening-weekend figures. When Warner Brothers released Terminator 3, it overestimated the opening weekend by $28 million. HSX pegged it within $10 million.

Experts believe the exchange can price so accurately because it's based on the opinions of movie-goers, rather than a cabal in Tinseltown. Anita Elberse, a professor at the Harvard Business School who has researched the forecasting abilities of HSX and the like, says: 'A predictive market such as HSX brings in diverse opinions from a wide-ranging user base. While expert opinion is often thought to be the best resource for evaluating the 'success' of a project (in this case, the box office take of a movie), the broad-based input by actual users (movie-goers) through a market mechanism such as HSX typically leads to more accurate predictions.'

HSX's Costakis agrees: 'HSX has such a broad range of users you get lots of opinions, and this huge diversity helps to come up with our predictions.'

The searchers
The ability of predictive markets to spot future trends and events has prompted a number of companies, including the Hollywood studios, to use them as a source of market research. Professor Elberse adds: 'This information is beneficial to companies - for example, Hollywood studios - in that it provides a guide to the likely size and composition of the audience, and it does so at a relatively early stage. Studios find predictions especially useful in decision-making regarding pre-release advertising and other promotional expenditures.'

Admiral John Poindexter developed a similar strategy for the US government two years ago. His plan was to use a predictive market-trading on potential terrorist threats to help determine when attacks might occur. The idea was canned when politicians realised this would allow people to profit from terrorist atrocities. However, the idea of betting on future news events is proving popular, and a number of predictive exchanges have opened for business. Some, including HSX and the BBC's Celebdaq, are games; others, such as the Iowa Electronic Market (which bets on political events), use real money.

Dublin-based Intrade (intrade.com) is one of the new predictive markets that allows gamblers to bet on more than just financial data or sporting events. The exchange sets a market price for an event and then matches traders who make the bet between themselves.

One of the hot topics on Intrade is the competition to win the 2012 Olympics. Paris leads the betting with a price of 63, which means Intrade believes there's a 63% chance that Paris will get the nod. If a punter thinks Paris will win, he puts a stake on every point over 63% (up to 100, obviously). If Paris does succeed, the payout will be 37 (100-63) multiplied by the value of the stake. If he bets on Paris losing, and it does, he will win 63 times the stake.

Monsters inc
Other popular Intrade bets this year include the chance of Michael Jackson being convicted for lewd acts against a child. The market believes there's a 71% chance Jackson will be found guilty on at least one count.

Intrade also allows punters to bet on what level the Homeland Security alert in the US will be at during a certain month (red for high danger, green for safe and so on). This is about as close as punters can currently get to Admiral Poindexter's terrorism predictor.

Mark Irvine, chief marketing officer for Intrade, believes these new gambling opportunities are attractive to punters because they're events that effect their everyday lives. 'We saw that in 2003 with the capture of Saddam Hussein, which struck at the heart of many traders, or last year with the phenomenal success of the US Presidential contracts,' he said. 'When money is involved, people choose to trade on the persona they believe will win, not necessarily the person they would like to win. We had many Democrats trading against Kerry in the Presidential race in the strong belief that Bush would win. Profit, not sentiment, is the key to any effective trading strategy.'

Whether as a game or a real-money bet, these exchanges are offering gamblers a chance to play a much wider field. If they continue to attract punters, we may all be referring to a movie star's share price when deciding what film to see on a Friday night.